How Long Til I Recoup My Money??
Hello All!!
Quick question. I am looking at buying a 6 unit commercial property. Asking price is $140,000 and it has been on the market for 5 months. What should my initial offer be? Is there a formula some of you use to figure this out?
Also, when looking at a potential deal like this, what is a good period of time I should be able to recoup my investment in? One investor told me that if he can't get his money back in 5-7 years, it is not a good deal; I have heard others say 2 years.
Any advice or opinions?? All is welcome.
Thanks in advance 
Chris G
I don't know about your deal because you didn't provide a whole lot of information.
As far as recouping your money...you are talking about your Cash on Cash (COC) return.
The COC = Annual Dollar Income / Total Dollar Investment.
The total dollar investment is NOT the purchase price. It is whatever it is you put down...your out of pocket cash.
A 20% COC is good. This is what your friend is getting when he looks at recouping his money in 5 years, a 20% COC.
Take the decimal number of the COC and divide it by 1 and you will get the number of years it takes to get your money back.
20% COC = .2
1 / .2 = 5 years (to get your money back)
100% = 1
1 / 1 = 1 year (to get your money back)
50% COC = .5
1 / .5 = 2 years (to get your money back)
Also, this is just an investor observation. The more you leverage, the higher your COC goes up.
Example:
You have a rental that cash flows $100 a month. Lets ignore the purchase price and say it's going to take $5000 to get in the deal.
$100 x 12 = $1200
COC = $1200 / $5000 = .24 or 24%
However if you managed to get different financing and was able to get into the deal with only $1000 and your cash flow went to $75 a month..... watch what happens to your COC.
$75 x 12 = $900 a year
$900 / $1000 = .9 or 90% COC
Moral of the story is, the more you borrow, the higher the COC is... But the COC is just one factor when analyzing a deal.
Thanks nebulousd
Actually your last example is pretty close to what I have figured for the COC. I have all the numbers including expenses and income: both monthly and yearly.
What other factors should be involved when deciding about recouping my investment.
All you advice has been most helpful and I will be sure to use it when I sit down with the numbers tonite!!
Thanks...
CHris G
1 more thing...
That cash flow you used in your example, would that be cash flow AFTER expenses or before? I know that may sound like an elementary question, but I am still a little new to this :-(
Thanks again..
CG
The COC uses the Total Annual Income. Therefore, the income is derived from what is let over after expenses.
Cash Flow is ALWAYS the after expense figure.
Also, when looking at commercial property, you may sometimes see the NOI....the Net Operating Income.
The NOI is NOT the cash flow. The NOI does not take into account the debt service.